Return to rents on the cards?

by Philip Meade of Davis Meade Property Consultants

WHILST not directly relevant to agricultural tenancies in England and Wales, the recent publication of the Final Report of the Agricultural Holdings Legislation Review Group in Scotland has interesting and possibly serious implications for the future of agricultural tenancies in England and Wales.

Published in January, the report is the result of an industry-wide consultation after a 42 per cent decline in let agricultural land since 1982 left Scotland with one of the lowest proportions of tenanted land anywhere in Europe.

Whilst many of the recommendations are specific to Scotland (right to buy, conversion to Limited Duration Tenancies (LDT) etc) many of the findings (based on a similar if not identical statutory background to the 1986 and 1995 Acts) make interesting reading as do the recommendations made particularly in relation to rent.

As per paragraph 15 of the report: The business of determining a fair rent lies at the heart of the landlord/tenant relationship. A landlord must feel that the income received represents an appropriate return on investment in agricultural land when considered against risk, lease obligations, and capital.

A tenant must feel that their investment, expertise and labour are similarly rewarded. The same is very much true of the tenanted sector in England and Wales. Landlords understandably expect an appropriate return on their investment but a simple expression of rent as a percentage of capital value oversimplifies matters. Landlords usually become landlords either by inheritance or through purchase.

When inheriting land, it is difficult to identify the level of investment made as the land has not been “purchased” as such. In addition, a number of other factors drive investment into agricultural land including tax treatment, capital growth, asset security and there is always an acknowledgement that one day vacant possession will be realised and with it a significant jump in capital value.

At paragraph 18: Tenant farming is historically based on a partnership between capital and labour but over recent decades the proportion of capital employed that is provided by the tenant has risen markedly.

This has in turn led to challenges to arrangements for compensation at way-go, and issues relating to investment security when tenants seek to raise capital from third party investors (usually banks).

Again, this can be said to be true of tenant farming in England and Wales. The capital required in a modern farm business has increased significantly over the last 20 to 30 years as a result of many factors. Couple this with legitimate worries by landlords about financing the payment of compensation for such improvements; it is no wonder that investment in tenanted farms is falling at best and nonexistent at worst.

Perhaps the most enlightening conclusions of the group can be found at paragraphs 112,114 and 115 and recommendation number 3:

Paragraph 112. While landlords have an entirely legitimate right to seek a fair return on their investment in agricultural land, government has an obligation to ensure that the rents charged do not conflict with public interest priorities in relation to agricultural land use.

At present the majority of tenanted land (around 80 per cent) is under secure 1991 Act tenancies that are already subject to rent controls.

For the time being, the Review Group believes that it is reasonable to continue to control the rents on these holdings, and in a manner that is closely linked to their use for agricultural production

Paragraph 114. The public interest focus referred to above has led the Review Group to conclude that rents for secure 1991 Act tenancies should, for the time being, be controlled to reflect the potential agricultural productivity of the land, taking account of the landlord’s and tenant’s obligations under the lease. It is neither in the public interest for rents to be set too or too low.

Paragraph 115. The current statutory formula for fixing rents for secure 1991 Act tenancies does not achieve this, as it is based on factors not directly related to agricultural productivity.

There is in reality no open market in secure 1991 Act tenancies so that the necessity to use as comparators rents obtained for LDTs in a market distorted by scarcity have led to some unusually large rent increases in recent times.

The Review Group, therefore, concluded that, for the time being, statutory arrangements relating to the setting of rents for secure 1991 Act tenancies need to be fundamentally changed so as to fully reflect the underlying public interest in productive use of agricultural land.

This includes a requirement to remove reference to open market comparisons, scarcity and marriage value.

Recommendation 3 – Legislative provisions on rents for secure 1991 Act agricultural tenancies should be amended so that rents are determined on the basis of the productive capacity of the holding, farmed by a hypothetical tenant (who is an efficient and experienced farmer of adequate resources who will make best use of the land) using the fixed equipment provided by the landlord, taking account of the budget for the holding, and including the contribution from non-agricultural diversified activity. Rents for Farm Business Tenancies are fast becoming, or have already become, untenable with many rents tendered purely to secure the land and often not even for agricultural purposes.

Removal of productive and related earning capacity and reliance on open market comparables was a central tenet of the 1995 Act and one of the consequences has been a raising of almost insurmountable barriers to would-be new entrants and the next generation. This has led to the loss of many smaller units with unseen social and economic consequences for rural communities and businesses.

If Scotland is about to address this by re-introducing a link between rent and productive capacity, is it just a matter of time before this solution is considered south of the border? If it is also considered here that “….government has an obligation to ensure that the rents charged do not conflict with public interest priorities in relation to agricultural land use” then all eyes will certainly be on developments north of the border over the next few years.

A return to rents based on productivity may well be on the cards.

Philip Meade can be contacted on 01691 659658 or via email: philipmeade@dmpropertyconsultants.com 

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